How can investors hedge against inflation?


Bitcoin (Bitcoin) Was created after the 2008 financial crisis to solve the problems caused by loose monetary policy.The creator of cryptocurrency Satoshi Nakamoto stated at the end of 2008 that the supply of cryptocurrency Increase “According to the planned amount”, “may not necessarily lead to inflation.”

The cryptocurrency’s inflation rate has been fixed, and its circulating supply is capped at 21 million coins, and it is expected to be mined in 2140. At that time, BTC’s inflation rate will drop to zero. In contrast, legal tender does not have a limited supply and can be printed to adjust monetary policy.

An expansionary monetary policy, such as those implemented by most countries in the world in the past few years, aimed at reducing interest rates and seeing Central Bank Participates in Quantitative Easing.

This expansionary monetary policy has long been considered Lead to higher inflation, Defined as the depreciation of payment instruments when the cost of goods and services rises. November, Inflation in the U.S. Rise to a 30-year high Eurozone inflation record The highest number in 25 years.

Cointelegraph contacted many experts in the industry and commented on these figures. Almost all of them pointed the finger at expansionary monetary policy. In an interview with Cointelegraph, Chris Kline, chief operating officer and co-founder of the crypto retirement platform Bitcoin IRA, said that inflation is not temporary and forces people to “look for alternatives to protect assets.”

Klein pointed out that although gold and real estate were good choices in the past, real estate prices are now “off the chart” and gold is “unavailable to ordinary Americans.” He added that Bitcoin is now part of an “inflation hedge portfolio” because its supply cannot be manipulated like the supply of fiat currency.

In an interview with Cointelegraph, Martha Reyes, head of research at Bequant, a cryptocurrency exchange, pointed out that the market quickly responded to the latest inflation data by pricing the central bank’s potential interest rate hikes. For Reyes, “the root cause of these high inflation data is the substantial increase in the money supply, because the pandemic has created trillions of dollars in new currency.”

Historically, gold has been used as a hedge against inflation. Bitcoin and other cryptocurrencies are often referred to as “Gold 2.0” because of the features they possess that can make them digital versions of precious metals.

Cryptocurrency as a solution to fight inflation

Cryptocurrencies are known for their violent volatility. Even blue-chip crypto assets can crash up to 50% in a short period of time. This type of volatility has caused many people to question whether BTC and other cryptocurrencies can be a viable inflation hedge.

In a report to clients, strategists from Wall Street banking giant JPMorgan Chase recommended 1% of the investment portfolio is allocated to Bitcoin It can be used as a tool to hedge against fluctuations in traditional asset classes.Billionaire investor Carl Icahn (Carl Icahn) also once Support BTC as a tool to hedge against inflation.

In an interview with Cointelegraph, Adrian Kolody, founder of the non-custodial decentralized exchange Domination Finance, responded to Kline’s view that Bitcoin is an inflation solution, but pointed out that in the cryptocurrency field, there are other ways to hedge against inflation.

Collodi pointing Decentralized finance (DeFi) Department as a viable alternative.He suggested by using Stablecoin—— Cryptocurrency with price control mechanism -With decentralized applications (DApps), investors can “surpass inflation” while resisting the “risk of spot positions”. To do this, they only need to find a way to earn stable currency interest above the annual inflation rate. Collodi said:

“The best way to look at it is that encryption gives you the flexibility to control your finances in various ways, rather than at the mercy of the federal government.”

Reyes pointed out that Bitcoin is “more attractive as a store of value than other assets such as commodities” because the growing demand can only be met through price increases rather than additional production.

The exchange’s research director added that the cryptocurrency is in the “early adoption stage,” which means that it “often has no consistent correlation with other assets, and its price appreciation should come from the halving cycle and the growth of the network.”

She added that Bitcoin is therefore “more resilient to economic downturns, although it may also be affected initially in the sharp sell-off of the market because some investors cut their positions across the board.”

Earlier this month, Bitcoin appeared to demonstrate its potential as a hedge against inflation because it Hit one Turkey hits record high With the country’s legal currency, the lira began to fall in free fall. Others believe that the Turks are best to invest in gold.

Utility and freedom, or legacy assets?

So far this year, Bitcoin has performed significantly better than gold because it has risen by 94% since the beginning of January. In contrast, gold fell by more than 8% over the same period, which means that investors who have bet on precious metals to hedge against inflation so far have failed.

In Turkey’s short-term, precious metals did what it needed to do: it protects people’s purchasing power by maintaining its value when the lira plummets. In the past 30 days, it has even surpassed Lira’s BTC.

Looking at it down, it is clear that BTC is a better bet. So far this year, Bitcoin has risen by 270% against fiat currencies, while gold has gained 70%. The data shows that only when the crisis escalates, investors will be better to bet on gold, but in the long run, BTC will be a better bet.

Regarding whether investors should choose Bitcoin or gold as an inflation hedge, Collodi believes that “Bitcoin and cryptocurrency standards” are a better alternative to fiat currencies or the gold standard, adding that trustlessness and permissionlessness help Cryptocurrencies stand out.

He said this enables encryption and DeFi structures to be as strong as they are, because investors “do not have to worry about political puppets” and they can “strangle” the value of their funds by “simply restricting the system.” Although he sees gold as an appropriate inflation hedge, for him, BTC is the “clear choice”:

“Investors trying to decide whether BTC or gold should be used as an inflation hedging tool need to ask themselves whether they want the utility and freedom of hedging, or traditional assets.”

Karan Sood, CEO and Managing Director of Cboe Vest, Cboe Global Markets’ asset management partner, told Cointelegraph that it’s worth noting that Bitcoin’s relative nascent history “has been two-way in the past” because of “Bitcoin and inflation.” The period has risen and fallen successively.”

Sood added that Bitcoin’s inherent volatility has the potential to amplify these volatility. For example, he said that if the current level of inflation proves to be temporary and falls from a high level, Bitcoin “may also fall sharply, exposing investors to significant potential losses.”

As a solution, Sood suggested that investors who wish to use BTC to hedge against inflation may “be benefited by seeking strategies to manage the volatility of Bitcoin itself to gain exposure to Bitcoin”.

Yuriy Kovalev, CEO and founder of the cryptocurrency trading platform Zenfuse, said in an interview with Cointelegraph that although the free fall of the lira may mean that betting on gold is a good move, it is not the case for American investors:

“Gold underperformed this year, falling by 8.6% against the US dollar, while the US CPI rose by 6.2%. Gold failed investors who bet on it, and BTC has risen by 92.3% year-to-date, rewarding those who believe in it as a hedging tool .”

Reyes acknowledged that while Bitcoin offers better returns as measured by the Sharpe ratio, investors may “hope that the gold in their portfolio is used for diversification purposes, even if it does not perform well this year.”

At least for more conservative investors, a diversified investment portfolio may be a smarter solution to hedge against inflation, because it is not yet clear how the price of Bitcoin will change if inflation continues to rise.

A vague truth

In general, it is unclear whether Bitcoin and cryptocurrencies provide a better solution to the current financial system. For Stephen Stonberg, CEO of the cryptocurrency exchange Bittrex Global, “We should strive to achieve a balanced combination of the two systems.” Stoneberg said:

“Both models have advantages, but if we want to reach people who don’t have bank accounts in the world, Bitcoin and the entire digital asset economy need to be further integrated into the traditional financial system.”

Caleb Silver, editor-in-chief of Investopedia, a financial information portal, told Cointelegraph that when it comes to Bitcoin hedging inflation, “the truth is vague.”

According to Silver, Bitcoin is a relatively young asset compared with traditional inflation hedging tools such as gold or the Japanese yen. Although it has the characteristics of being “an important part of an inflation hedging tool”, its sharp price fluctuations will Affect its reliability.

For him, investors need to keep in mind the volatility of the past decade:

“In the past ten years, it entered 20 different bear markets and experienced a decline of 20% or more in nearly 80% of its history. Before the pandemic, consumer prices had not been in the past ten years. Obviously fluctuated.”

Silver added that even though institutional investors have adopted Bitcoin for more than two years, it is still a “highly speculative asset.” He concluded by stating that most market participants did not view Bitcoin as a means of storing wealth, “damaging its credibility as an inflation hedge.”

To hedge against inflation, investors can use a large number of tools, not just Bitcoin. Only time will tell us what works and what does not work, so a diversified investment portfolio may be the answer for some investors. According to our experts, the tools they can use include BTC, gold and even DeFi protocols, which can help them surpass inflation.